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Turnkey Redefined

Engineering and construction firms adapt to a changing market.

Fortnightly Magazine - December 2011

can manage. We have all the capabilities, so why not?

When we find a site and get it ready, it becomes a valuable asset to either bid into an RFP for a power purchase agreement, or to sell to an owner. But we never provide equity beyond an EPC contract. We’re not in it to own plants for the long term.

 

Fortnightly: What trends do you see in EPC contract terms? What does ‘turnkey’ mean today?

Oskvig, Black & Veatch: We’re passing through a period of investor risk-offloading that’s more intense than I’ve seen before in my 36-year career. Some of that follows from what happened in 2008 and 2009 [when some project owners got stuck with prices and terms that no longer made sense after the economy declined]. It’s no longer about risk management. Now it’s risk-offloading. Some very bad decisions will be made in this time period that will manifest themselves over the next two or three years, and then we’ll get back into a mode of collaboration and risk sharing.

As an EPC contractor, you have to take risk in this business or you’re irrelevant. But you shouldn’t take risk you can’t reasonably manage, and that’s what’s been making its way into terms and conditions—offloading the whole risk onto a service provider.

There’s a lot of pressure on utilities to contain rates. Their stakeholders are looking to management to make deals with suppliers and service providers that they think are airtight, and that loads all kinds of risk onto the service provider. What they don’t realize is they’re exposing themselves to another kind of risk. A few years from now, we’ll look back and say that was a bad idea. Things will happen, and that will cause problems for owners because they’ll get a project that’s not completed, or isn’t built as well as it should be, or doesn’t perform well, and there will be no one there to back it up. So we’re not going to take any risk we can’t reasonably manage.

For example, labor productivity is what EPC firms are all about. But that’s not the same thing as labor availability. Labor availability is a market condition that an EPC provider doesn’t have a lot of control over.

Another example involves things that are affected by weather. You can build and install equipment according to the industry’s best practices, procedures, materials, etc., but weather happens, and it can affect the equipment. That’s a risk the owner ought to be taking—not a service provider. We’re obligated to design and build according to the conditions set forth in the agreement, but other things happen and that’s where risk is getting unbalanced.

To be fair, progressive owners understand the best place to be is where the owner is managing the risks they can manage, and we manage the risks we can, or you put it in another place where someone else can reasonably manage it.

Olander, Burns & McDonnell: With the sheer size of transmission projects, our owners are pretty risk averse. They just want to deliver power